Morningstar Investment Management published a new research paper, “The Impact of the Default Investment Decision on Participant Deferral Rates: Managed Accounts vs. Target-Date Funds,” which is sure to stoke some serious debate among the investment industry.
Key data points cited in the research paper suggest those investors who were previously defaulted into managed accounts tend to save around 1% more on average compared with those defaulted into a target-date fund (TDF). The data comes from 66,000 actual participants enrolled in 195 defined contribution plans that offer either a target-date fund or managed accounts as the plan default investment.
Important to note, the difference in deferral rates declines to approximately 0.5% after controlling for plan and participant attributes, such as industry or tenure, but Morningstar stresses this is still a significant contribution gap that can have a big impact on wealth by the end of a 30- or 40-year investment cycle. In fact, Morningstar argues the increased savings benefits measure among managed account users are likely to outweigh the costs of such products over TDF pricing, especially for those with smaller account balances relative to their incomes.
“The average participant, who is assumed to be 45 years old and does not roll over a balance upon enrollment, would benefit from using a managed account if the annual fee were 2.4% of total assets or lower—as long as savings rates increase, not taking any other potential benefits of managed accounts into consideration,” the report claims.
Other findings suggest outperformance of managed account investors compared with TDF investors at the median is even stronger, with those DC participants defaulted into a managed account saving 2% of salary more than the median participant defaulted into a TDF, at 6% and 4%, respectively.
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